Rationally Defeating Cronyism in the Boston TNC Suit

Kristian Stout —  5 April 2016

On March 31, a federal judge gave the city of Boston six months to rectify the disparities between the way it treats Transportation Network Companies (“TNC”) (such as Uber and Lyft) and taxicab companies. This comes pursuant to an order by US District Court Judge Nathaniel M. Gorton in a suit filed by members of the Boston taxi industry against the city and various officials. The suit is an interesting one because it reveals unusual fault lines in the ongoing struggle between taxi companies, local regulators, and the way that federal law recognizes and respects property and economic rights.

The three chief claims by the Boston taxi medallion holders are that the city had wronged them by by devaluing their medallions in violation of the Fifth Amendment’s prohibition on regulatory takings, by discriminating against them in favor of TNCs under the equal protection clause (“EPC”) of the Fourteenth Amendment, and by violating Massachusetts law under a theory of promissory estoppel.

On the federal claims, the court seems to get it half right, and half wrong.  In sum, Judge Gorton seems to get the takings argument more or less correct. He notes:

The exclusivity of medallion owners’ access to the market prior to the arrival of TNCs existed by virtue of the City’s regulatory structure rather than the medallion owners’ property rights.  Medallion owners have no property interest in the enforcement of Rule 403 against others  … If a person who wishes to operate a taxicab without a medallion is prevented from doing so, it is because he or she would violate municipal regulations, not because he or she would violate medallion owners’ property rights.

Indeed. The plaintiff’s takings argument essentially amounts to a claim that the government, by virtue of creating the medallion system, is thereby disabled from ever regulating in a way that disrupts medallion owners from making a profit. Efficiency concerns, consumer safety concerns, and the like be damned! takings can be a fairly complicated body of law, but it seems highly unlikely that the plaintiff’s view is right—for one thing, a medallion is much more like a business license subject to health and safety considerations than it is like a property right— and Judge Gorton handily disposes of the plaintiff’s claims.

However, on the EPC analysis Judge Morton’s analysis goes off the rails. He first properly notes that, as an economic rights claim, the EPC analysis is controlled by rational basis review. As the legally trained reader will already know,  “[r]ational basis review simply requires that there be “any reasonably conceivable set of facts justifying the disparate treatment.”

According to the Supreme Court:

[B]ecause we never require a legislature to articulate its reasons for enacting a statute, it is entirely irrelevant for constitutional purposes whether the conceived reason for the challenged distinction actually motivated the legislature.

And as Clark Neily, a constitutional litigator from the Institute for Justice, has noted: “Not only is the government invited to dream up entirely post hoc rationalizations for challenged legislation, it has “no obligation to produce evidence” in support of those rationalizations either.” (citing Heller v. Doe).

In short, rational basis review is an exceedingly easy burden for the government to meet when one of its regulations is challenged.

In this case, Boston offered a number of reasons that it decided to regulate TNCs and taxi companies differently, including a very strong one that doing so “enhances the city’s interest in increasing the availability and accessibility of cost-effective transportation[.]” Nonetheless, Judge Morton disagreed, holding that

[T]he Court finds persuasive plaintiffs’ argument that many of the obvious differences between taxis from TNCs, such as the kind of vehicle used and the fact that taxicabs must be clearly labeled, are caused by the City’s application of the requirements of Rule 403 to taxi operators but not to TNCs.  The City may not treat the two groups unequally and then argue that the results of that unequal treatment render the two groups dissimilarly situated and, consequently, not subject to equal protection analysis.  Such circular logic is unavailing.

The judge pegged his opinion to the fact that Rule 403 — which regulates “hackney carriages” — defines the subject of its regulations as “used or designed to be used for the conveyance of persons for hire from place to place within the city of Boston.” Both TNCs and taxi cabs arguably fit into this definition, thus for Judge Morton, despite the fact that the city offered at least two policy goals for its differential regulations, “[n]either objective is … rationally related to any distinction between taxi operators and TNCs.”

This just has to be wrong under current federal law. As I noted above, rational basis review requires “any reasonably conceivable set of facts”  and, even though the city created the distinctions itself through its regulations, the reasons it states for doing so — including increasing availability of transportation for its citizens — are definitely rationally related to its distinction between the two types of consumer carriers. Sure, Rule 403 provides a scope of regulatory power for the city that sweeps in both TNCs and taxicabs, but within that regulatory scope the City then has the power to “rationally” assign rules as it sees fit (unless someone comes up with a fundamental right here that is more important than economic interests, of course).

I get it, rational basis review of economic regulations is frustrating and often just provides a free pass to protectionist regulators. Nevertheless, it is the law, and I think that Judge Morton got the equal protection claim wrong.

The real lesson here? Don’t get into bed with government and expect a virtual monopoly to protect you indefinitely. It’s no secret that federal law provides scant little protection for economic liberty, so when the government decides it wants to do something that harms the industry that it was previously cozy with it’s just too bad. Maybe there is a future world in which courts will recognize the right to earn a living is as deeply important as the right to speak or practice your religion or vote — but that is not the world we live in today.

Moreover, when an industry depends upon the government to explicitly protect it from competitors it is the worst kind of cronyism, and, at least in this case, represents an economic mindset that is badly aging. As upstart competitors like Uber and Lyft discover new ways to deploy cost-effective (and generally just more effective) technology to manage different industries, the fig leaf of legitimate government intervention is stripped away and revealed for what it often is: protectionism.

So to some extent, I sympathize with  Judge Gorton’s instinct in the equal protection claim: it should be the case that the government is not allowed to pick winners and losers in the economy based on its own taking of the political temperature. But the larger lesson is the opposite of the plaintiff’s intention, in my opinion. The government should roll back the regulations that created the medallion industry in the first place, and find a way to strike a politically feasible deal that eases the taxi companies out of their well-painted corner. We need more competition and more service in pursuit of consumer choice, and we need much less industry control guided in a top-down manner by state fiat.

Kristian Stout

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Kristian Stout is the Associate Director for Innovation Policy at the International Center for Law and Economics (ICLE). As a technology professional and entrepreneur for over ten years, Kristian’s scholarship is influenced by a practical understanding of the challenges facing innovators in the modern economy. Kristian has previously been a lecturer in the computer science department of Rutgers University, is frequently invited to speak on law and technology topics, and has been published in law journals and legal treatises. Kristian is an attorney licensed to practice law in New Jersey and Pennsylvania, is a partner at A&S Technologies, a software services firm, and sits on the board of CodedByKids, a nonprofit organization that provides STEM education to underprivileged children.